What happened
Shares of Digital World Acquisition Corp. (DWAC +0.00%) were down by more than 12% as of 12:04 p.m. ET Monday.
The special purpose acquisition company (SPAC), which hopes to take Trump Media & Technology Group public, has struggled in recent days after a hedge fund announced it is shorting the stock. Digital World's share-price troubles may also be getting exacerbated by Elon Musk's efforts to buy Twitter.
So what
Last week, Kerrisdale Capital Management announced it was shorting the SPAC because it doesn't believe regulators will sign off on its planned merger with the Trump-backed company behind the Truth Social platform.
Image source: Getty Images.
The Securities and Exchange Commission (SEC) has been scrutinizing the SPAC industry intensely, and Kerrisdale said that the regulator has an opportunity to send a message to the entire SPAC industry by rejecting this deal.
Kerrisdale waved numerous red flags regarding Trump Media & Technology Group, among them asserting that it lacks the "infrastructure necessary to function as a public company." The hedge fund also believes that the deal is unlikely to go through because one of Digital World's sponsors has seen multiple SPAC deals it was behind rejected by the SEC.
Those earlier deals were killed, Kerrisdale concluded, because the SEC found that the companies in question "lacked even basic indicia of credibility or legitimacy."
Shares of Digital World took off last year after the SPAC announced it would merge with the Trump Media & Technology Group, largely because investors believed that Trump could bring an audience to the platform, allowing it to challenge mainstream social media apps.
NASDAQ: DWAC
Key Data Points
Now, shares of Digital World are struggling at the same time media outlets are reporting that Twitter's board may be willing to accept Musk's offer to buy that company. Musk has been critical of Twitter over free speech issues recently, and his ownership may lure some users who left due to its posting policies back to the platform.
Now what
If Musk takes over Twitter, that could be a threat to Truth Social and other would-be social media disruptors on the right. If the current critics of Twitter see him instituting speech policies at the company that suit them, they'll have less need to seek out alternative platforms.
But overall, I'm much more worried about the issues brought up by Kerrisdale's short report and the challenges Truth Social has faced already -- among them, technical issues, falling downloads, and the departures of high-level executives. So I am staying away from shares of Digital World Acquisition Corp.
